What must occur for a good to violate the Law of Demand?
A) The good must be normal and the income effect must be larger than the substitution effect.
B) The good must be normal and the substitution effect must be larger than the income effect.
C) The good must be inferior and the income effect must be larger than the substitution effect.
D) The good must be inferior and the substitution effect must be larger than the income effect.

Question

Quizplus · Accepted Answer

The Law of Demand states that, ceteris paribus, as the price of a good increases, the quantity demanded decreases, and vice versa. For a good to violate this law, the income effect (where a change in the price of a good affects the consumer's purchasing power) must dominate the substitution effect (where consumers substitute a good for another due to a change in relative price). This typically happens with inferior goods, where an increase in income leads to a decrease in the demand for these goods. Thus, if the income effect is larger than the substitution effect for an inferior good, it could lead to a situation where the Law of Demand is violated, as consumers might demand more of the good even as its price increases, due to the increase in their real income making them feel richer and thus buying more of the inferior good despite its price increase.

What Must Occur for a Good to Violate the Law